BKL tax specialist Stephen Deutsch looks at the tricky task of providing tax advice to clients who are divorcing. This article was originally published in UK200Group Talking Tax (April 2012, Issue 82).
It is never an easy task to provide tax advice to clients who are
about to divorce, but this unease is compounded when it dawns
on the client that not only will he or she be obliged to share
assets with an estranged spouse but may also be required to pay
a share to HM Revenue & Customs.
In many instances, all that the parties are seeking to achieve is a
simple exchange of marital assets, and we are all aware that the
tax advice will differ depending on how early in the marriage
breakdown the advice has been sought.
Take the couple who ceased to live together in the previous tax
year and are now divorcing and wish to split up the trading
company that they had built up together and in which they each
held 50% of the equity. The company operates two residential
nursing home businesses that are broadly of equal value and
they have agreed to each take a nursing home and its associated
business and go their separate ways. The harshness of the
capital gains tax regime can be overcome by carrying out an
‘exempt demerger’ which will also exempt the distribution of
company property from income tax.
But that isn’t the end of the story. The splitting of the company
will also involve the transfer of fairly valuable properties, one of
which is valued at £2.25m and the other at £2.75m so that SDLT
is relevant. This transaction fails to qualify for Reconstruction
Relief which provides full exemption as it is not what is often
termed a ‘cross the board’ demerger but will qualify for
Acquisition Relief which limits the SDLT charge from the full rate
of 4% to a rate of ½%.
There are two ways in which the transaction may be carried out.
If the parties are content for one of the two Residential Home
trades to be transferred to a new company which will be
controlled by one spouse leaving the other spouse in control of
the existing company and its remaining residential home and
trade, SDLT of ½% will be chargeable on the value of the
property transferred. Sensibly, the property with the lower value
would be demerged and SDLT of £11,250 is payable on the
transfer to the new company of the property valued at £2.25m.
But what if neither spouse is prepared to inherit the “baggage” of
the existing company, and both wish to carry on their respective
trade from a newly incorporated company. In this case, in
addition to the legal costs of winding up the company, SDLT of
£25,000 would be payable on property worth £5m.
And don’t forget, the SDLT relief might unravel so that the full
rate would become payable if the ownership of the company to
which the demerged trade has been transferred changes within
three years whilst the company still owns the transferred